State taxes on retirement income

In short

I remember sitting at my grandfather's kitchen table when he opened his first pension check and muttered something about state tax that I did not understand at the time. Where you live in retirement can change how much of your income you keep. Eight states take no income tax at all, so Social Security, pensions, and withdrawals from your IRA or 401(k) pass through untouched by the state. New Hampshire taxes neither wages nor business income, only interest and dividends, and that tax ended after 2024. Other states exempt Social Security completely but tax other retirement income at their regular rates. The rest apply varying rules: some carve out the first few thousand dollars of pension income, some tax everything, and a handful offer credits or deductions that shrink as your income climbs. Your state's treatment of retirement income is not a secret. Every revenue department publishes a table or a guide.

The whole of it

What it is

A friend of mine moved from California to Nevada the year he retired and used to joke that the state paid for his golf. State taxes on retirement income are the income tax a state collects on money you receive after you stop working. That money arrives as Social Security benefits, a pension from a former employer, withdrawals from a traditional IRA or 401(k), or distributions from other tax deferred accounts. Some states impose no income tax, so nothing is withheld. Nothing is owed at year end. Others tax retirement income the same way they tax wages. A third group writes special rules: Social Security might be exempt while pension income is taxed, or the first several thousand dollars of retirement pay might escape tax while the rest is added to your return.

The distinction matters. Two retirees with identical incomes can owe sharply different state bills depending on the address on their return. One household might keep every dollar of a monthly Social Security check, while another a few states over loses seven percent to state withholding.

How it works

You probably already know that federal tax applies to most retirement income, though the rules for Social Security depend on your combined income. Roth withdrawals are usually tax free. State tax sits on top of that framework, but every state writes its own code. If you live in Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, or Wyoming you pay no state income tax on any source of income. Wages or retirement dollars, the rate is zero. New Hampshire does not tax wages or business income. It did tax interest and dividends, but that tax was repealed and ended after 2024 according to the New Hampshire Department of Revenue Administration.

If your state does collect income tax, it starts with one of two approaches. It either adopts federal adjusted gross income as the starting point and then adds or subtracts specific items, or it begins with federal taxable income and makes its own modifications. Social Security is the most common modification. Some states follow the federal treatment exactly. If part of your Social Security is taxable federally it is also taxable at the state level. Other states with an income tax either exclude Social Security entirely or apply a partial break that phases out above an income line.

Pension and IRA withdrawals are treated as ordinary income in most states. A pension you earned working for a private company is taxed the same way a salary would be. A handful of states offer a subtraction. Illinois excludes all retirement income from private and public pensions as well as IRAs and 401(k) plans. Pennsylvania does not tax distributions from retirement accounts or pensions at all. Other states set a dollar cap, excluding the first several thousand and taxing the rest, or they phase out the exclusion as your federal adjusted gross income rises.

Military pensions receive preferential treatment in many states. The specific rules vary widely. Some exclude military retirement pay completely, others exclude a portion, and several give it the same break they offer any pension. Your state revenue department site will list the treatment in its military section or retiree guide.

The numbers, and where to find yours

If you are planning a move or simply want to know what you will owe, the first stop is your state's department of revenue website. Most states publish a retiree tax guide or a schedule. Every exclusion and credit appears there. The names vary: one state calls it a retirement income exclusion, another a pension and annuity subtraction, a third a senior credit. The effect is the same.

Social Security exclusions are straightforward. States that exclude it say so on the first page of their individual income tax instructions. States that tax it point you to the federal worksheet for determining the taxable portion and then import that figure onto the state return.

Pension exclusions come with income limits and caps. Georgia, for example, allows a retirement income exclusion that starts at age the current figure, which the official source publishes each year for certain income types. It rises at age the current figure, which the official source publishes each year. The exclusion amount is listed each year in the Georgia Department of Revenue instructions for Schedule 1. Colorado offers a pension and annuity subtraction with a maximum amount that adjusts for age. It shrinks if your federal adjusted gross income exceeds a threshold published by the Colorado Department of Revenue. You will find the current year figures in Publication DR 0104, available as a PDF on their site.

Do not assume the rules are stable. States change exclusion amounts, phase out thresholds, and retirement income treatment when budgets tighten. Surpluses change things too. Check the instructions for the current tax year, not a summary written three years ago.

A worked example

Consider a woman named Helen who retired last year at age sixty six. She receives 1,900 dollars per month in Social Security, about 23,000 dollars for the year. She withdraws 30,000 dollars from her traditional IRA to cover the rest of her expenses. Her total retirement income is 53,000 dollars.

If Helen lives in Florida, her state tax is zero. Florida collects no income tax. The 53,000 dollars is hers after federal tax.

If she lives in Missouri, Social Security is fully exempt by state law. The IRA withdrawal is ordinary income. She adds the 30,000 dollar IRA distribution to her Missouri return, applies the standard deduction and any senior credit for which she qualifies, and calculates tax on the remainder at Missouri's rates. Her Social Security does not appear on the state return at all.

If Helen resides in Colorado, she can subtract a portion of her pension and IRA income using the state's pension and annuity subtraction. She is limited to the annual cap for someone her age. For tax year 2024 that limit is the current figure, which the official source publishes each year dollars for a taxpayer aged fifty five to sixty four. It rises for those sixty five and older to the current figure, which the official source publishes each year dollars. Helen is sixty six, so she may subtract up to that higher limit. Suppose that figure is 24,000 dollars. She subtracts 24,000 from the 30,000 dollar IRA distribution. That leaves 6,000 dollars of state taxable retirement income. Her Social Security remains exempt because Colorado does not tax it. She pays Colorado income tax on 6,000 dollars plus any other income such as interest.

If Helen moves to Minnesota, both her Social Security and her IRA withdrawal are added to her Minnesota income. Minnesota includes Social Security in taxable income to the same extent the federal government does. She uses the federal worksheet to find the taxable portion of her Social Security. She adds the full IRA distribution. Then she applies Minnesota's brackets and credits. Minnesota offers a subtraction for certain retirement income, but it phases out at higher income levels. It may not cover all of her IRA distribution.

The tax Helen owes will differ between these states. Florida takes nothing. Missouri and Colorado tax only part of her retirement income. Minnesota taxes more of it. The reason is simply where the mail arrives.

Where it goes wrong

I once watched a neighbor plan his retirement around a state tax break he read about online. He discovered the rule had sunset two years earlier. The single largest mistake is relying on outdated information. State legislatures revise tax codes every session. A break that existed when you last checked may no longer apply. Always confirm the rule in the current year instructions published by the state revenue department.

Another trap is misunderstanding the difference between an exclusion and a credit. An exclusion removes income from your taxable base. A credit reduces the tax you owe after the calculation. A 1,000 dollar exclusion in a state with a five percent rate saves you 50 dollars. A 1,000 dollar credit saves the full 1,000. The labels matter.

People also overlook phase outs. A state might exempt the first 10,000 dollars of pension income, but only if your federal adjusted gross income stays below a threshold. Cross that line by a single dollar and the entire exclusion can vanish. Read the fine print on every schedule.

Some retirees assume that because they paid into a state pension system while working, their pension will be tax free in retirement no matter where they move. That is not how residence works. If you earned a California teacher's pension but retire to Oregon, you become an Oregon resident for tax purposes. Oregon will apply its rules to your total income, including that pension. The state where you worked does not control the outcome. Your residence on the day you receive the money does. Each state publishes its treatment of retirement income on its revenue department site. Check Oregon's guide before you move.

A few states tax retirement income but offer property tax credits or rebates that offset the income tax for many retirees. Comparing states only on income tax misses half the picture. Total tax burden includes property, sales, and any special levies. The state with no income tax may have the highest property rates in the region.

Questions to answer before you leave this page

Does your state tax Social Security benefits, and if so does it follow the federal calculation or apply its own formula? Does your state offer an exclusion or subtraction for pension income, and what is the dollar limit this year? At what income level does that exclusion begin to phase out? If you receive a government pension, military retirement, or teacher's pension, does your state grant it any special treatment? Does your state provide a credit for retirement income or for taxpayers over a certain age, and how is that credit calculated? If you are considering a move, have you compared not only income tax but property tax, sales tax, and estate tax between your current state and the new one? Where on your state's revenue department website are the current year instructions and schedules that list every exclusion, and have you downloaded the PDF for this filing year rather than relying on a summary?